Hemosphere Acquisition

9 Months Ended

Sep. 30, 2013

Hemosphere Acquisition [Abstract]

Hemosphere Acquisition

4.  Hemosphere Acquisition  

Overview  

On May 16, 2012 CryoLife completed its acquisition of 100% of the outstanding equity of Hemosphere, a privately held company, for $17.0 million in cash, an additional $3.2 million to pay for cash acquired, and contingent consideration with a fair value estimated to be approximately $1.8 million at acquisition, for a total purchase price of approximately $22.0 million.  CryoLife used cash on hand to fund the transaction and operates Hemosphere as a wholly owned subsidiary.  

Hemosphere is the developer and marketer of the Hemodialysis Reliable Outflow Graft (“HeRO® Graft”), a proprietary graft-based solution for end-stage renal disease hemodialysis patients with limited access options and central venous obstruction. 

Contingent Consideration  

As of the acquisition date, CryoLife recorded a contingent consideration liability of $1.8 million in long-term liabilities on its Summary Consolidated Balance Sheet, representing the estimated fair value of the contingent consideration expected to be paid to the former shareholders of Hemosphere upon the achievement of certain revenue-based milestones.  The acquisition agreement provides for a maximum of $4.5 million in future consideration payments through December 2015 based on specified sales targets.  

The fair value of the contingent consideration liability was based on unobservable inputs, including management estimates and assumptions about future revenues, and is, therefore, classified as Level 3 within the fair value hierarchy presented in Note 2.  The Company will remeasure this liability at each reporting date and will record changes in the fair value of the contingent consideration liability in other expense (income), net on the Company’s Summary Consolidated Statement of Operations and Comprehensive Income.  Increases or decreases in the fair value of the contingent consideration liability can result from changes in discount periods and rates, as well as changes in the timing and amount of Company revenue estimates. 

The Company recorded a gain of $32,000 and a loss of $37,000 in the three months endedSeptember 30, 2013 and 2012, respectively, and losses of $46,000 and $62,000 in the nine months endedSeptember 30, 2013 and 2012, respectively, on the remeasurement of the contingent consideration liability.  The gains and losses in the current and prior year periods are due to the effect of the passage of time on the fair value measurements and changes in the Company’s estimates.  The balance of the contingent consideration liability was $2.0 million as of September 30, 2013 and $1.9 million as of December 31, 2012.

Accounting for the Transaction

The Company recorded an allocation of the $22.0 million purchase price to Hemosphere’s tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values as of May 16, 2012.  Goodwill was recorded based on the amount by which the purchase price exceeded the fair value of the net assets acquired, and is not deductible for tax purposes.  Goodwill from this transaction has been allocated to the Company’s medical devices segment.  The purchase price allocation was finalized as of December 31, 2012. 

CryoLife incurred transaction and integration costs related to the acquisition of approximately $2.4 million for the year ended December 31, 2012.  These costs were expensed as incurred and were primarily recorded as general, administrative, and marketing expenses on the Company’s Summary Consolidated Statement of Operations and Comprehensive Income.  The Company incurred integration costs during the three and nine months endedSeptember 30, 2013 related to the transfer of manufacturing operations.  The Company does not expect to continue to incur significant transaction or integration costs in the fourth quarter of 2013.